Math – Page 8

The Sexy World of Dividend Yield Stocks

February 1, 2012

Fine, but who's the woman in the back? Is she the Belgian au pair whom Dad will eventually have an affair with?

Time to debate the merits of another 2012 investing buzzword. It seems half our personal finance blogger contemporaries are incorporating stocks with high dividend yields into their portfolios. So what’s a dividend yield stock and should I care? Should I be interested? Should I take my money out of T-bills and start investing in dividend yield stocks immediately?

Most blue-chip stocks pay dividends. Yes, you get money just for doing the company the favor of purchasing its stock. If that sounds unduly generous, you’re forgetting that purchasing the stock doesn’t just make you an investor. It makes you an owner of the company. You’re the person in charge, however minimal your particular influence is. En masse, the owners can demand payment – a reward for the company’s success, if you will. Single proprietors and partners enjoy their companies’ profits, so why shouldn’t the person who owns one millionth of Google? Sure, it might make more sense to invest the profits back in the company, but as an investor, that’s not necessarily your concern. Putting money back in the company might, or might not, result in an increased stock price down the road. Paying a dividend will benefit you immediately (or at the end of the quarter, or whenever the company calculates it.)

Dividend yield is just a company’s annual dividend divided by its stock price. A company that pays a quarterly 50¢ dividend and whose stock is trading at $10 has a dividend yield of 20%.

If you think it’s insane to give 20% of the company’s value back to the owners, you’re right. At that rate, assuming static growth, within 5 years the company would evaporate from largesse. As a rule, 3% is considered high.

CPI Corp (NYSE: CPY) (it stands for Consumer Programs Incorporated) is the company that Sears farms out its infamous Portrait Studios to. Walmart, too. If there’s a picture somewhere of you and your siblings smiling awkwardly on a carpeted white stool in front of an anodyne gray background, then there’s a good chance your family has done business with CPI.

You’re not going to believe this, but those department store studios aren’t as successful as they were in the 1980s. Frankly, they were always kind of a holdover from the days of daguerreotypes, back when cameras were luxury items. Today, when any iPhone can capture pictures indistinguishable from the ones Sears Portrait Studio takes with an Olympus E-1, CPI is about to go the way of Borders Books & Music and Solyndra. Which is reflected in the stock price, which fell from $30.48 in December of 2010 to $1.59 today. The company’s market cap is $11.2 million. Just put it out of its misery already.

Yet it still pays a quarterly dividend of 25¢, which means a dividend yield of 63%. Which is like a baseball player with a batting average of .833. Unsustainable. No other company currently has a dividend yield of higher than 20% (That’s American Capital Agency, a real estate investment trust.)

Dividends are a drug, hard for investors to wean themselves off once they’ve become accustomed to a certain dose. A history of quarterly 25¢ payments means that if CPI lowers its dividend, it’ll prompt those few investors who are still around to jump ship and sink the stock price once and for all. The New York Stock Exchange threatened CPI with delisting, unless the price somehow sextuples.
The rationale for buying high dividend yield stocks is that you’ll presumably receive lots of cash per dollar spent on the stock itself. However, it’s easy to forget that just because you can divide one quantity into another, doesn’t mean you should. Look at the opposite situation: if the stock you buy turns out to have a low dividend yield, that means it has a high price, and how is that bad?

Seeing as dividends are cash, that means they derive from cash flow. Which brings us to the least heralded of the major financial statements, the cash flow statement.

Check out total cash flow from operating activities. CPI brought in $39,067,000 via that method last year. And paid out 17% of it as dividends. That’s hardly excessive. Coca-Cola pays out 43%. But it reminds us how stock price – an arbitrary number that represents nothing more than a collective opinion among buyers and sellers in the marketplace – has little to do with the concrete accounting entry that a dividend payment is.

A history of regular dividends is a welcome thing. A history of high dividends relative to stock price means nothing. It can’t mean anything, because a truly high dividend yield can’t last for any length of time.

Update: CPI got sued last week. Class action. The plaintiffs argue that the company was doing worse than management was letting on. CPI had to change the terms under which it borrows money, which means no more dividend, which means its dividend yield has fallen 63 percentage points. Isn’t this fun?

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Filed Under: Investments, Making Smart Choices, Math Tagged With: dividend yield, dividend yield stocks, sears portrait studio

2011 Man of the Year

January 4, 2012

This photo was taken 146,000 “Yes honey, I was wrong”s ago

Every year we choose an honoree who embodies the Control Your Cash principles. For instance, here’s last year’s. The award itself is nothing physical, just a commendation here on CYC. Winning doesn’t even guarantee you notoriety; the 2010 winner appears to have fallen off the face of the Earth. This year’s winner is erstwhile presidential candidate Herman Cain.

This is not an endorsement of his political candidacy. And the preceding sentence doesn’t mean that we reject his candidacy, either. Moot point, anyway. For the record, our guy is Ron Paul, the most principled candidate since Calvin Coolidge. But Paul’s story doesn’t illustrate our point as well as our Man of the Year’s does.

It’s an easy mindset to get into, that building wealth is restricted to the moneyed class, the bluebloods, the politicians and their scions, what the filthy people who appear to have finally removed themselves from Zucotti Park called “the 1%”. No, this is America. Believe it or not, complaining about The Man wasn’t always our national pastime.

We can agree that 130 years ago, being born into a poor family was a far greater obstacle than it is today. Let’s split the difference and look at whether being born into modest circumstances 65 years ago would result in a life of want and need.

Our previous Men of the Year have been relatively obscure; just regular folk who buy assets, sell liabilities, and enjoy the inevitable wealth that accrues. In 2011, class warfare became such an overriding theme of life in America that we had to look for a Man of the Year whose story proves that growing up modestly is neither a necessary nor a sufficient condition for staying that way. There are millions of people like that, but our winner was easy to find biographical information on.

Here’s a man who ran for the office of most powerful person in the world, and whose parents were a housekeeper and a barber/janitor. He grew up black in the 1940s and 1950s in Memphis and Atlanta, which is similar to growing up Jewish in the 2010s in Damascus and Aleppo.

Again, read what his parents did for a living. Their collars were bluer than Lake Tahoe. Young Herman studied hard in school, and applied to the University of Georgia. As a black man. In 1963. You’re not going to believe this, but they didn’t allow him in.

So Herman turned to a life of recreational drug use and folk songs. Just kidding, he attended historically black Morehouse College instead and earned a degree in women’s studies. Alright, more kidding. Women’s studies didn’t exist at the time. Math, on the other hand, did and always will. He majored in that, and followed it up with a master’s in computer science.

This didn’t guarantee him a life of riches, but it helped immensely. It almost certainly guaranteed him a job. Civilian ballistics analyst for the Navy, if that sounds like something worth aspiring to.

From there, you’re probably somewhat familiar with the story. But advancing from computer systems analyst to CEO of a major corporate subsidiary to director (and then chairman) of a regional Federal Reserve Bank was just gravy. What got Herman Cain the Control Your Cash Man of the Year award was his ability to make sound decisions that lesser people just refuse to make.

Yes, he bought some assets and sold some liabilities along the way, financial ones. But he applied the same principles to hugely important non-financial decisions, too. Living the right way (or not living stupidly) is a hell of a lot more crucial than remembering to rebalance your 401(k) with the recommended asset classes. Here’s an example.

Herman Cain’s family creation plan, in chronological order:

Get married
Have one kid
Have another
STOP.

There are some intermediate steps, e.g., look at your net worth and cash flow and determine if you can create another mouth to feed, but what we’ve given you there is the gist of it.

Your average poor person’s family creation plan, also in chronological order:

Get pregnant/impregnate someone.
Weigh having the kid versus sucking it out with a vacuum tube.
Collect welfare either way.
Get pregnant/impregnate someone again, not necessarily the person in Step 1.
Repeat Step 4.
Remain unmarried. Or get married, for no better reason than you’re already in too deep.
Divorce. Somewhere along the way, introduce substances to assuage the self-inflicted pain.

Your average poor person’s education plan has fewer steps than the family creation plan, but they’re just as stupid. And none of them involve the hard sciences.

Public disclosure forms estimate Cain’s wealth at between $2.9 million and $6.6 million. If you grew up miles and decades from the nearest lynching and/or cross-burning, what’s your excuse for your net worth?

This article is featured in:

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Filed Under: Making Smart Choices, Man of the Year, Math, Role Model Tagged With: 2011, Herman Cain, man of the year, morehouse college

“控制现金”人造橙色鸡

December 9, 2011

Mama was a yellow hen, Daddy was a Rhode Island Red

You know who America’s greatest financial writer is? Adam Carolla. Interspersed with the penis jokes and complaints about the feminization of society, the esteemed author of In 50 Years, We’ll All Be Chicks explains the necessity of weighing time against money.

He cites an example most of us can relate to; losing your nail clippers. You used them, failed to put them in the usual place, and now know that they’re only somewhere in the house. But you’re too rushed to commit more than a few minutes to a hard search. So your nails grow and grow, and finally you break down and head to the drugstore for another pair. Sure enough, minutes after you return you find the original pair and get mad at yourself for buying something unnecessary.

Carolla’s solution isn’t just to suck it up and buy a pair of clippers. It’s to buy 8 pairs of clippers. Put one in your bathroom, one in a kitchen drawer, one in your car, maybe one in the garage, and you’ll never have to waste time looking for clippers (nor let your nails grow long) again.

A pair of clippers costs 69¢, which is peace of mind on the cheap.

Suba at Wealth Informatics submitted a post to the Carnival of Wealth a few weeks ago in which she mentions that frugality for its own sake (saving the 69¢ you’d pay for a redundant pair of clippers) is usually more trouble than it’s worth (spending an hour tearing the house upside-down looking for the clippers, frustrating yourself before ultimately conceding defeat.)

Suba thinks the people waiting in line at Costco for discounted members-only gas are nuts. And she occasionally, shamelessly eats professionally prepared food instead of being frugal. Restaurant markups notwithstanding, she argues that the math works out.

There’s at least one other financial blogger who loves to break down the recipes that he and his Midwestern family enjoy. His Alexa rank is tens of thousands of places better than ours, even though he writes like an 8-year-old who just mastered the rules of grammar, but he loves to brag about how little it costs to feed his family. (That he’s overweight is just a delicious bonus.) We’re here to argue that eating at a restaurant, in our example one a step below P.F. Chang’s “upscale casual” category, can be financially savvy.

Our guinea pig: Panda Express’s famously addictive orange chicken. Not only is it the greatest large-scale dish ever invented, an entire wing of the internet has been devoted to reverse-engineering its recipe. We’ve tried it ourselves, and the closest we’ve come has been the following. (We’re not going to write the recipe, just the ingredients and their prices. This isn’t RachaelRay.com.)


2 lbs. boneless, skinless chicken breasts	$5.33
1 egg	1.00*
1 1/2 teaspoons salt	1.00 (26 oz.)
white pepper, undefined amount	9.00
12 oz. cooking oil	3.49
1 1/8 cup cornstarch	1.40
1/4 cup flour	1.70 (5 lbs.)
1 tablespoon gingerroot	2.59 (4 oz.)
1 teaspoon minced garlic	2.00 (4 oz.)
1/2 teaspoon crushed red hot chili pepper**	3.00 (1.2 oz.)
1/4 cup green onion	0.50
1 tablespoon rice wine	4.28 (10 oz.)
1/4 cup water
1/2 teaspoon sesame oil	7.43 (7 oz.)
1 1/2 tablespoons soy sauce	1.88 (5 oz.)
5 tablespoons sugar	1.00 (1 lb.)
5 tablespoons white vinegar	“
zest of 1 orange	0.50
Raw TOTAL	47.10
TOTAL (per recipe unit)	10.90

This recipe is supposed to serve 6, so that’s $1.82 a serving if you go with the per-unit ingredient prices. The $47.10 sounds like a steep initial investment, but then again, what are you supposed to do with the unused rice wine, ginger, garlic and sesame oil if not eventually make more faux-orange chicken?

We’ve cooked this enough times to know that it makes an unholy mess in the kitchen. And it takes at least 2 hours to go from assembling the ingredients to putting the final mixing bowl in the dishwasher and pressing “Start”.

Panda Express sells individual servings of orange chicken on a bed of rice for $3.75 each. Plus theirs is actually orange, as opposed to the burnt ocher that our version usually ends up being. Furthermore, the original is perfectly crisp on the outside and tender within. Ours is more than edible, but any aspiring cook who presented it during an audition would be told to hand over the spatula and find another line of work.

Still, we can’t overlook the fabulous savings of CYC Faux-Orange Chicken over its corporate counterpart. A whole $1.93 a serving. Servings #3 through #6 of the original batch go in the fridge, and by the time we reheat the gelatinized sixth a few days later, it’s time to head to the store for more green onions and other perishables. Meanwhile, every serving Panda Express sells is as fresh and hot as its predecessor.

Don’t forget to add the 2 hours it takes to cook. Even if you account for that as 20 minutes per serving, at some point you realize you should be spending less time hovering over a calculator and more time eating.

Cook because it’s fun, not because you’re doing it in lieu of shopping for a home loan that’s a few basis points cheaper. Frugality should be a personality trait, not an overarching life philosophy.

*Of course no egg costs a dollar, unless it comes from a Giant ibis. We’re buying the smallest possible quantities of each item – in this case, a dozen eggs. You can’t buy a single egg, just like you can’t buy a quarter-cup of flour.

**We’re imagining Anthony Kiedis being thrown in a hydraulic press, and getting excited at the idea.

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